By Colin Barr
January 25, 2011

Taxpayers aren’t the only ones benefiting from the recovery at Citigroup.

Hedge fund manager John Paulson has made $1 billion on his bet on Citi (C), he said in his year-end letter to investors. Paulson, who made a fortune betting on the collapse of the housing bubble, started betting on big U.S. banks in mid-2009.

At the time, few people were banking on any economic recovery, even one as weak as this one, which meant the price for troubled bank stocks was right.

“Citigroup demonstrates the upside potential of many of the restructuring investments we have added to our portfolio and our ability to generate above-average returns in large positions,” Paulson said in the letter, Bloomberg reported.

Paulson, whose fund also has a big gold position and held $2 billion worth of Bank of America (bac) stock as of September along with lesser amounts of Wells Fargo (wfc) and JPMorgan Chase (jpm), said he continues to wager on a recovery. One of his more recent bets on that trend is a big purchase of casino stocks this past spring.

“We believe the U.S. economy is recovering and we anticipate continued growth,” the firm said in the letter.

The news of Paulson’s latest triumph comes as the government cuts its last ties with Citi. Treasury said Monday it would sell 465 million warrants to buy Citi shares at auctions being conducted Tuesday by Deutsche Bank.

The warrant sale comes a month after Treasury sold the last of the common shares it acquired in propping up Citi during the economic meltdown of 2008 and 2009. The government has said it scored a $12 billion profit on the Citi bailout.

The warrant sale should add modestly to that sum. Treasury said bidders will be able to buy the warrants, which give holders the right though not the obligation to buy shares at a set price for a certain period, for prices starting at 15 cents a warrant for one class and 60 cents for another.

At the minimum bid prices, Treasury would raise $185 million in the sale.

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